Kaplan Says Fed Right Not to Raise Rates in July

Summary

Robert Kaplan describes a bifurcated economy: infrastructure and AI-related areas are strong, while housing, autos, and low-to-moderate-income consumer areas are sluggish. He argues the Fed was right not to raise rates in July, would not have cut in December, and should keep an open mind until September because of crosscurrents including oil-driven inflation, AI infrastructure inflation, and disinflationary AI adoption and Chinese overcapacity.

• Economy is strong in infrastructure and AI-related areas but sluggish in housing, autos, and low-to-moderate consumer areas.
• Labor market shows neither aggressive hiring nor aggressive firing; unit labor costs are well behaved.
• Profit share of GDP is increasing while labor's share is more muted.
• War in Iran and the oil price spike have raised headline inflation.
• AI infrastructure build is probably inflationary; AI adoption and Chinese overcapacity should ultimately be disinflationary.
• Kaplan would not have raised rates in July and would not have cut in December, preferring to keep options open until September.